AutoSave IF OFF RESU Chapter 6 HW-1 Home Insert Draw Page Layout Formulas Data Review View Tell me Share Comments Times New Roman X G v 10 ~ A ab Wrap Text General Insert v 7 4 Delete Paste BIU Av = = = Merge & Center v Ideas Y Conditional Format Cell Formatting es Table Styles Sort & Filter Sensitivity Format v Find & Select V K L . N 0 P Q R S M37 . fx . B C E F H I J 59 60 Problem 2: Constant Dividends We now think The ABC Company will pay a constant, non-growing dividend of $5.50 forever. An investment with 61 comparable risk is earling 8%. What is the value today of one share of The ABC Company? 62 63 Under the assumptiuun of no growth, the stock's dividend streat is a simple perpetuity. 64 65 Given: 66 67 Definition Notation: Inputs: 68 The expected constant dividend D. 5.5 69 The required rate of return on the firm's common stock 0.08 70 The present value of the stock share (market price) P, 71 72 Finance Concept: Under the assumption of no growth, the stock's dividend streum is a simple perpetuity. 73 74 Numerical Solution: P = D. 75 P.-5.5.0.08 76 P - $68.75 77 78 In Words: The Present Value of a stock share with expected constant dividends of $5.50, and a required return 79 of 8% is S68.75 80 81 Test your skills: 82 1 What is the cstimated stock price whose dividends are expected to bc S0.75 forever with a 83 required return of 10%? Use the formula Pe=Dr. 84 85 2 What is the estimated stock price whose dividends are expected to be 0.75 forever with a 86 required return of 20%? Use the formula P, - Di. 87 88 Stock + # E2 - + 145%